Little known facts about Old Age Security you need to know

Little known facts about Old Age Security you need to know

How much will Old Age Security pay me?

When should I take Old Age Security benefits?

How does Old Age Security income factor into my other income plans/needs for retirement?

Let’s face it – when it comes to government benefits – what-to-take-when and how-much-will-you-get-when – these answers are an important part of your financial plan.

Luckily you have this site to lean on for some answers!

Previous articles on my site related to Old Age Security (OAS) have provided some answers to a few of these questions and more:

What is Old Age Security – is it time to overhaul this program?

What are some retirement withdrawal strategies to consider – should you defer OAS inflation-protected income?

If you decide to defer OAS should you defer you Canada Pension Plan (CPP) benefits as well?

OAS 101

Here are some fast facts about OAS – little things you need to know:

• Canada’s largest pension program – funded by general tax revenues. This is not a contributory plan like CPP is.
• A sum of money designed to provide a minimum quality of life for older Canadians.
• A monthly payment available to most Canadians aged 65+ who meet legal status and residence requirements. It is determined by how long you have lived in Canada after the age of 18.
• You *must apply to the program to receive the money. (*Actually, some people are now approved for OAS in advance, and must let Service Canada know if they want to defer.  My understanding is that automatic approval applies to anyone receiving their CPP before age 64 and who have 40 or more years of CPP contributions.  You can contact Service Canada for details.)
• OAS is unrelated to employment history.
• OAS payments are indexed to inflation (quarterly) using the Consumer Price Index.
• Regardless of your marital status, the maximum payment amount is about $601/month** (**Current at the time of this post.)
• OAS payments are considered taxable income and this income is subject to recovery tax (the “OAS clawback”) if your individual net income is beyond a particular threshold. Seniors must pay some or all of their OAS income back if their annual income is > $75,910 for the 2018 tax year (> $77,580 for the 2019 tax year.  This clawback is also indexed annually like federal tax credits and personal tax credits.

Now that you have the low-down on OAS, there are some little known facts about OAS I thought you should know.  To assist with this post, I asked Doug Runchey to come back to the site.  Doug is a CPP and pension specialist who has more than 30 years of experience working with both CPP and OAS programs.

Doug, government benefits like OAS are always a hot topic with Canadians.  These conversations are getting more heated given not everyone has a government pension or a defined benefit pension from work.   This makes OAS a very valuable program for many Canadians.  But many Canadians don’t know they can defer OAS payments – they simply assume they should take it at age 65 – as soon as possible.

Some Canadians don’t know this fact:  by voluntarily deferring OAS benefits until age 70, Canadians can increase their OAS payments by a whopping 36%.

Why are so many Canadians hesitant to defer this particular inflation-protected benefit?

Great questions Mark and very important ones for Canadians to answer.

I believe there are two big reasons for the relatively small number of people deferring their CPP and/or OAS:

1. There are “money on the table people” – these people are afraid that they won’t live long enough to recoup the money that they deferred to get the higher monthly pension payment.
2. There are “bird in the hand people” – these people know what they are eligible for now, but they’re afraid that the government will change the rules if they wait.

Most Canadians are in group 1 or 2 or are a combination of both!

So if a retiree could choose then, which program to defer, what are the main reasons to defer CPP instead of OAS?  

I think it’s important to recap the reasons why you could defer either program or both programs or none of the above in this post:

Why should you defer your government benefits including CPP to age 65 or 70.

Essentially, you take CPP or OAS or both as early as possible, because:

You may consider taking CPP or OAS or both as late as possible, because:

·         you need the money to live on now (probably the biggest reason)! ·         you have good reason to believe that you have a shorter-than-average life expectancy; ·         you already have a good reliable defined benefit pension with full indexing – so CPP and OAS are really “the gravy” – such that you want to leave a legacy; take the money now and invest it.

·         you don’t really need the money now; you can reasonably defer it; ·         you have good reason to believe that you have a longer-than-average life expectancy; ·         you don’t have a reliable defined benefit pension with full indexing, so CPP and OAS are integral to your inflation-protected, fixed-income financial well-being; ·         you wish to drawdown some or all personal assets (e.g., RRSP assets, non-registered assets) and transfer the market risk away from you to the CPP or OAS; ·         you aren’t concerned about leaving a large estate – enjoy your personal assets first!

When it comes to deferring CPP instead of OAS – people need to consider this: 

CPP payments have a benefit bump of 42% if Canadians wait until age 70 to take their CPP benefit (versus 36% for OAS benefits starting at age 70). So, all things being equal it makes more sense to defer Canada Pension Plan versus Old Age Security. 

Another little known consideration, why someone might defer CPP but not OAS:  they are still working Mark.

Canadians can increase their future CPP benefit payments working in their 60s due to the extra year(s) of maximum earnings/contributions – in addition to the 42% increase for the 5-year deferral to age 70.

Great stuff Doug – you’ve validated my thinking on a few things long-term! 

So, are both CPP and OAS benefits clawed back?  I think some Canadians get this wrong.

I think what confuses Canadians Mark is that both CPP and OAS are taxable income, but only the OAS is subject to a 15% surtax (affectionately known as the OAS clawback you mentioned above) if your income exceeds the yearly threshold ($75,910 for 2018).

Now, if you believe you might be subject to any OAS clawback, then this could be another good reason to defer your OAS (regardless whether you do or don’t defer your CPP), especially if you expect that your income from other sources might be lower after age 70.

I recently read about this little known fact:  should you apply to defer OAS and then suddenly pass away before your benefits begin, the executor of the Will can apply to begin the deceased pension with an effective date one year prior to death.  Is that true?  What are the benefits of this provision for couples?

Yes, it’s true Mark; that the Estate can receive up to 12 months of OAS if someone hasn’t applied for OAS prior to their death (the same is true for CPP, but only if they are over age 70 when they die). I personally don’t see this as a factor in deciding whether to defer or not though.

Some Canadians don’t know this fact:  does OAS have a survivorship benefit like CPP does? 

OAS payments end with the month of death, and there is no survivor’s benefit at all under the OAS program (unless you consider the Allowance for a survivor as a survivor’s benefit, which I don’t).  This Allowance is a bit complicated (it’s essentially for lower-income Canadians) so that’s a post for another day!

What Canadians need to know is, the same rules for what is considered income for Guaranteed Income Supplement (GIS) purposes apply to the Allowance for the Survivor.

Now, I should add, when it comes to survivorship benefits for CPP – there are two main formulas used; depending upon the survivor’s age follows:

• If/when the survivor is under age 65, the amount is 37.5% of the deceased pensioner’s “calculated retirement pension”, plus a flat-rate-benefit of $189.31 (for 2018);
• If/when the survivor is age 65 or older, the amount is 60.0% of the deceased pensioner’s “calculated retirement pension”.

Without getting too technical, “calculated retirement pension” means the amount of the deceased contributor’s CPP before any decrease or increase for the age-adjustment factor if they took their CPP before or after age 65.  There are more details about this to come in future blogposts.

Good details once again.  Alright, so you’re approaching age 65.  You’re still working full time or even part time.  Should you take OAS starting at age 65?  

I believe if you’re still working after age 65, you should consider deferring your OAS especially if your current income is above the OAS clawback threshold.

Working beyond age 65 might also be a reason why you might defer your CPP (especially if your current earnings will increase your “calculated retirement pension”) or it might be a reason to take your CPP at age 65 (especially if your “calculated retirement pension” is already at the maximum amount and you want to opt out of making any further CPP contributions (especially if you’re self-employed and paying both portions of the CPP contribution)).

I’ve heard about this:  some retirees worry about being underpaid by CPP and that might occur to OAS – can that really happen?  What little known fact can you share on that?

The main reason why some people are being underpaid by CPP is that their recent earnings information is not available to Service Canada when their CPP is initially calculated, and Service Canada sometimes appears to “forget” to recalculate their CPP once they receive those earnings/contributions details from Revenue Canada.

This never happens to OAS benefits because it is based on the number of years of residence in Canada as claimed by the person at the time of application.

Some Canadians don’t know this fact:  while pension splitting is a great approach for many couples to save on tax, can they use OAS income for pension splitting purposes?

They cannot Mark.  Neither CPP nor OAS qualify for “pension splitting” under the Income Tax Act, but CPP has its own provision of pension sharing (officially known as an Assignment of CPP benefits). This pension sharing provision under the CPP is a two-way sharing of CPP benefits (unless only one spouse was a CPP contributor) that uses a fixed formula based on how many years the couple has lived together in proportion to their “joint contributory period”. The pension sharing is a temporary reallocation of their CPP benefits mainly for tax purposes, and it ends automatically upon the death of either spouse or earlier upon request of either spouse.

Great stuff Doug.  I want to thank Doug again for his insights and expertise in this post.  I look forward to posting more articles about OAS and other pension-related articles with Doug in the future!

Doug Runchey is a fan of My Own Advisor and a pension specialist who has more than 30 years of experience working with both CPP and OAS programs.  Doug contributes to many Canadian financial forums and writes pension-related articles for many financial blogs.  He runs DR Pensions Consulting (no affiliation) and is committed to helping people understand the government pension puzzle.

Got further questions about OAS?  Leave them in a comment and we can tackle them here are maybe cover them in a future blogpost.  Thanks for being a fan.